THE DOWNGRADING of Jamaica's country rating by the international rating agency, Standard and Poors, was hardly surprising even if the action was swift. For one thing the latest IMF Country Report had expressed concern about Jamaica's ability to meet its debt payments.
Then the Finance Minister's recent admission that government had not met its debt targets would have sent an immediate red flag to the international investment community. Significantly, the Standard and Poors report argued that the Government had eased its tight fiscal controls due to Parliamentary elections.
This downgrading could not have come at a worse time as it is likely to lead to increased borrowing costs for government in the overseas markets as investors demand a greater premium to put their funds in Jamaican Government sovereign bonds. This is occurring at a time when the Minister just disclosed that the total debt stock would increase this fiscal year by approximately $70 billion or 14 per cent to $560 billion. The Minister therefore had his eyes set on raising relatively cheaper funds overseas to retire some of his expensive local debt to demonstrate that he was definitely taking action on the debt issue.
This is not to say that the Minister will still not exercise this option, but that he will incur higher borrowing costs therefore driving up debt servicing charges. Additionally, with overseas funds more expensive, in the short-term the Finance Ministry will have to resort to borrowing more in the local economy. This will have the double-whammy effect of driving up short-term interest rates (or keeping rates high) as well as crowding out the private sector.
The economy is therefore on the horns of a dilemma as it is increased production spearheaded by the private sector that will drive increased production; but the sector will remain beset by high interest rates and a growing but not yet robust stock market.
The main lesson in all this is that failing to act when there is a problem does not make it go away. The debt crisis has been with us for some time and despite recommendations by some of the island's most reputable economists to revisit the present model, the authorities have simply deferred the problem to another fiscal year. The economy hardly heals itself; it demands swift corrective measures.
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